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00:30:00

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San Francisco 12, Mta 6, Daly City 4, The City 4, Sfmta 3, Randy Keller 1, Campbell 1, Risken 1, Steve Bell 1, Daly 1, Kirsten 1, Kirsten Mcgeary 1, Kersten Mcgeary 1, Goodmans 1, Expirations 1, South City 1, Exexplained 1, Jenon 1, Their City 1, Parcel 1,
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  SFGTV    [untitled]  

    October 4, 2012
    11:30 - 12:00am PDT  

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to apples or 34 to 70 even isn't apples to apples because there are operating costs the landlord will be paying over the course of this. i will also say my understanding -- they can correct me -- is that the appraisal did include the 4% increase. it would be good for us to all be clear on that. if i got that wrong, i apologize. my understanding is that it did. again, based on the appraisal, to answer your first question, i do believe it is a good deal, or at least a reasonable deal for the sfmta -- i guess what i would say is just because it is a good deal for the person on the other side of the signature block doesn't necessarily mean it is a bad deal for us. how we got to the point of seeking the purchase versus now bringing this lease to you, i would like to ask our real estate manager, cfo, to speak more directly to that. >> i appreciate that.
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i have specific questions about the lease. i don't have a problem with people making money on the other side, just don't want the mta to be taken advantage of. i think we need to get -- because if this is something that -- you know, if this is something that is a systemic problem where we are missing out on these opportunities, i would like to know how this happened because i think it really is an important issue. >> fair enough. good morning, supervisors. i'm kirsten mcgeary, senior management real estate, mta. so it's been a long process for us to find this site. we have looked at a number of properties for many years. we've been asked, why this site? we've looked at sites owned by goodmans. for instance, 12 to 13 acres in the southeast industrial area. it would take an eminent domain process. there's 20 or more small businesses in that property. the property for the land
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would be about $40 to $45 million, in addition to build a building the same size, 250,000 square feet would be another $20 to $30 million. we would be in the $60 to $65 million range. we have looked at sites for hazardous materials, south of the facility is owned by pg&e called the marantz and another site by jenon, that needs a lot of remediation. we have looked at port properties with state trusts on them. it's been a long process. this property we have negotiated for 14 months with prologis. it was a tough set of negotiations. this side has been through a lot of due diligence. the price of $21 million versus going out and finding another site, is they were able to move more quickly than the city and mta were able to move.
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we did purchase a site recently for our sustainable street shots. again, did a lease with an option to buy. we were able to convince prologis to have right of first negotiation. they didn't want to sell. they are a real estate investment trust, they just purchased this property last summer so need to gone rate dividends for shareholders. this enables sfmta the time to get our money together to purchase. we would like to purchase before 20 years, no doubt about it. >> again, i appreciate the information and i appreciate the work you've put into . this my question was not what other properties you have looked at but if we have known since 2004 there was a need to move somewhere else, if have known two years, got notice from the port for two years, that's a long time, how it is if we knew we had this need, why is it that someone like that would be able to move in quicker than we? is there something about the way in which the real
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estate department at the mta approaches its deals that makes it hard for you to be competitive relative to companies like this one that actually want to maximize the revenue? what happened exactly? >> again, it is a process. it's been 14 months no negotiate the lease. it is more time consuming for the city to do a deal. we don't have $21 million sitting around, waiting for us to do a deal. it takes time to get the grant funds or get the operating funds. we have done that with other properties. so the loose option, or in this case rider first negotiation gives us the opportunity to get the purchase as opposed to having to do it say within a 90-day closing period. >> i have a problem with that, because i understand the lease option has its benefits in terms of putting deal together. but clearly, relative to a purchase, a lease option here is a lot more expensive. whether the purchase price
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was $21 million or $34 million with interest, or even if it was $40 million or $50 million, you are talking about having to spend tens of millions more that we could have saved if we had actually moved in and bought it. so i would like to really figure out, you know, how do we address that systemic issue to make sure we don't find ourselves in a similar position where we are having to go down the road of leasing properties for things we know we need, when we could have purchased properties for a lot less. >> we agree with you. in an ideal world that would be the case. in a competitive commercial situation, where you have two parties -- two willing parties, a buyer and seller, they can close in 90 days . in the case of prologis, they are national and international and have billions at their fingertips. the city and mta do not have that type flexibility. >> i appreciate that.
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so if i can go into some of the specifics of the lease. >> certainly. >> so why guarantee a ten-year term. you know, you are basically stuck. you're agreeing to be stuck with this lease for ten years at $2.4 million a year. so if in three, four, five years you found a better option, you're stuck. why would we agree to that term? >> again, prologis did not want to give us the right to terminate at the end of ten years. and they're looking at -- they were looking at up to 22 other companies that were negotiating with them at the same time as we were. so it was very competitive. as we said, as an reit, want to generate dividend dents, don't want to sell right away. we had to convince them for the right of first
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negotiation so if they decided to sell we could purchase through the right of first negotiation. >> who were the other companies you were competing with? >> i can tell you the categories, if you'd like to know some of those. >> the budget and legislative analyst says they never got that information. >> we gave them the categories. prologis -- again, because it is confidential information, it is five food uses ranging from baking to produce. three storage uses, including traditional storage and vehicle storage. three recreational uses. three freight uses. four consumer products and distribution uses and two retail uses. >> but we verify that those companies were actually in the mix, or is that information that was given to us by -- >> that was given to us by the brokers and by prologis. >> the brokers verified that information for us?
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>> correct. >> why -- you know, you are paying an annual increase of 3%. why an additional 4% after five years? >> well, it is to alleviate prologis risk of forgoing higher rent. we are building it in, for our budget purposes and their budget purposes, stepping up instead of having an appraisal every five or ten years, which is what mta would have preferred. it was, again, negotiated. >> i just don't understand, given that the lease at the port doesn't expire until 2015, why don't we take the time to actually -- whether it is a better deal with this company, with prologis or, you know, this is a very dynamic market -- real estate market. why not take the time to actually find something where we are actually not being taken advantage of. what is wrong with waiting? >> again, as exexplained, it's been a long search.
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so the other properties we look at. for instance let's look at the good man. that would take five years to get into at a minimum * because of the eminent domain process. having to demolish existing warehouses and planning and funding and actually building an alternative property on the 12 to 13 acres. the port property is bare land that needs everything, from infrastructure up. the property that is south of pier 70, the jenon company property is, again, in total remediation need. the plan might be done by 2015. after that the remediation would occur. so this does not fit in with the time where the port has a one-year termination notice provision in their mou with the mta, so we can't turn on a dime, unfortunately. in terms of getting property of that size in the city. there is very little left.
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daly city is welcoming us, incredibly, to their city in this facility. >> have you approached prologis about, you know, the fact that some at least one member of the board but maybe others have questions about this. are they willing to renegotiate some of the terms of the lease? >> i have understood that that could be a deal-killer. >> what is wrong with verifying that and going back to them and saying we have issues with some of these terms. we have an issue with being locked in for ten years, we have an issue with 4%, we are not going to pay the 9% to 10% interest on some of the improvements, we want to renegotiate those terms. what is wrong with asking them that. >> we have asked them that. again, phase ii of the tenant improvements, it is an alternative if mta doesn't have the money. it is not that mta would
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prefer to use the 9% to 10% interest money. we would prefer not to but gives us an opportunity to get operating fund ready, which includes other mta uses. we have spoken to prologis, as i said. it's been 14 months of negotiations and approvals. so they are here if you would like to hear them speak. >> yeah, maybe we can hear from them. >> hello, my name is dan letter. i'm with prologis. >> yes, sir. so i guess, you know, i understand that, you know, any company wants to make as much money they can out of every deal that they are working on. but you are talking about, you know, doing business with the city and county that doesn't have unlimited resources. we don't have a lot of
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money and we have had to make many cuts over the years. this is a property that as i understand you bought for $21 million. the deal, as it is, you're set to make $70 million over the 20-year lease. are you open to renegotiating some of the terms that we have discussed? >> i will answer your question, then i would like to expand a little, if you don't mind. >> yes, please. >> we are not interested in renegotiating that lease. candidly, your team was very difficult to deal with. there's been a focus today and in the report that we move more quickly than the mta, when the reality behind it is this building was not on the market. the building became vacant. i am charged with finding real estate for our company.
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that requires me knocking on a lot of doors. i happened to knock on this door because of this uniqueness of this property. prologis were a global provider of warehouse space, pier 71. my goal is to have properties we can own long-term. * that requires me sitting in offices, talking them into selling things. this is a process that was long. although yes could we move quicker than the mta, yes. do we have billions sitting around, no. but it is a process that i sat and talked this owner into selling to us. knowing we were going to have a tremendous amount of interest from our global customers. we own 600 million square feet globally, 4,500 customers. we are name brands. i'm respecting the privacy of them. >> no, i understand.
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>> so i was the one that decided to not release those names because it is strategic decisions that affect employees and things like that that shouldn't be in the public arena. but it is important to know that i had a decision to make. your team is very shrewd. they are good negotiators. i looked at them across the table and i said i'm making a decision that we're going to work with you, but we're going to have this thing done by june, right? here we are in october. so with that we continued to negotiate. the deal changed many times. there was a lot of back and forth. and because we committed to your team to work in good faith, i have not continued negotiating with a number of these groups. we have lost a significant amount of money carrying this property much longer than we expected because of the amount of interest. as a matter of fact, not
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only do we lose that money by carrying the property longer but we are getting much less rent than we expected to get for this property. the market is very dynamic. this building today would be substantially more expensive. i would be likely not the winner of that because if somebody went to market this building, as you can read in the chronicle or business journal, prices are escalating at rates that are uncontrollable. to look at this property and say that it is $70 million compared to $21 million is a very -- i think there should be more focus on how that analysis is done. $70 million over 20 years, you need to put an npv, net present value on that. that is presently $37 million, right? so when you look at the pricing of this, it is a
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very fair deal. there was two things i had to go back to my board to get approval to agree on because i'm never allowed to give those in leases. the right of first negotiation to purchase the property. i had to go back and get approval. typically i will have decision making ability but i had to go to the entire board for that approval because your team was so strong that this deal was not happening without that. >> i appreciate your comments. something you said was very interesting in terms of how you found this property. to your knowledge, does the mta or other agencies do what you describe you did, which is you actually, knock on doors and identify properties that might work. >> i don't know that. i can't answer that. kirsten. >> kersten mcgeary. yes, we knock on doors, meet with property owners. i have brokers calling me
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on a daily basis. yes, we are pounding the pavement trying to find property. >> can i add to that actually. one of the only ways you can purchase property today in this very competitive environment is to provide that certainty. so we are buyers of property. one thing we have to prove to sellers is that when we look at you in the eyes and shake your hands and say we are going to deliver that, we have to deliver it. if i ever fumble on that, word will get out that prologis does not close on deals. so they can't make that happen. so we had to convince this guy we were going to sell. that certainty that we are able to provide is how we are able to get this thing purchased. >> listen, i will turn it over to my colleagues. i want to thank you for being here. i think that you should be very happy. i think your board should be very happy. i think you have done a really good job for your company. i think it is definitely a good deal for you guys.
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i will be honest, i understand the challenge. i understand the very difficult situation. i am not comfortable with this deal. i think that as a city agency that we still have to figure out, you know, how do we maximize the use of the very limited resources we have through our riders. i'm not convinced we are there. i say that respectfully. i know a lot of work went into it. i want to respect and acknowledge that work, but there are times even if this is as good as it gets, that is still not enough. for me where things are right now for this item i don't think we are there. and i think that we should take the time to do this right. but thank you for your time. thank you, colleagues, for your patience. >> thank you. supervisor kim. >> this question is for prologis as well.
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so i very much understand how the real estate market is incredibly dynamic. in particular here in san francisco the market is very strong for real estate. even as the city negotiates for extensions of leases and renewals we are finding prices of buildings we have been previously leasing are going up tremendously. i understand the tightness of the market. i'm not as family with daly city or with the peninsula. i think i need more information to be convinced on this lease. san francisco i understand. * given the value of real estate and value of site you own, i'm curious as from your interest point you want to lock in the sfmta ten years. given the fact the value of this property could go up why it is in prologis's interest to lock in when you may find a tenant that has the ability to pay far more than the city of san francisco. >> that is a great question.
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it is an analysis we constantly do in our very high demand areas like the city of san francisco. but the decision i made was to provide the certainty of this investment. locking it into a longer term. most groups that we were talking with were interested in a longer term, because it is very challenging. if we decided to go for a shorter term, it is very tough to pinpoint exactly what the building is going to be worth in seven years or ten years. so that is the risk that we take in entering into anything long-term. it is the nature of what we do. we had to make that decision. >> i mean there's risk on both ends. the value could go up tremendously and you are locked into this deal with us at a cheaper rate or the value goes down but at least you have that certainty for your investors. >> correct. >> my second question was
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regarding the right of first negotiation, which i know that the agency negotiated very hard to get. i'm appreciative as being part of the deal. i'm curious from your end do you believe then in the next 10 to 20 years there will be interest to sell this parcel, given the current value of it to your entity? >> you know, i don't know that. it is a very difficult thing. because it is so hard to buy property, especially in san francisco where the industrial base has shrunk tremendously over the course of the last ten years, it was very hard to find any sort of building even close. the northern property line of this is the city of san francisco, so you never know. i mean, there was a number of buildings that sold in 2008 after the market crashed that i never thought we would sell. to foresee that out in the
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future is too difficult to say. but i can tell you that it is very rare in our 4,000 buildings around the world that we offer or allow for any sort of negotiation right like this. >> thank you. actually my questions are then back to the sfmta. thank you very much. >> i had a number of questions. i do appreciate the e-mail we got last night, which addressed a number of them, including the leases that we terminated thus far in the past five or six years and some of the other questions we had as well. i'm curious, did we do a calculation of net present value of this lease in current dollars. >> yes, we have.
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three of us are real estate brokers on staff and have 20 or more years of experience in commercial. we have had one of the three brokers on staff do that analysis. to buy it today would be approximately $34 million, looking at what has gone on in the market. if we had to go out and find -- >> sorry, not the value of land. the net present value of the dollar amount of the lease. the value of the lease. >> yes, we have done that. we can get that information to you. i don't have that information at my finger tips. >> that would be great. what would also be helpful in looking at lease expirations an closed on that we no longer pay with private entities, it is helpful to get a sense of what has grown as well. so i know we ended lease with 25 but expanded an expensive lease with 1455 market, which i had a lot of questions about as well. never questioned the use.
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i always get where sfmta is coming and the need we have. whether it was for the center, 1455 mission or others. i'm getting a seasons of what we have closed out is great but it is good to get a sense of expansion and overall budget of real estate, what we pay in facilities. so it would be great if you could provide that to us as well. >> yes. >> the last thing is i was hoping that though the real estate master plan wasn't ready today we would still get something that would explain to us the overall need or assessment. is that something you can provide to us now? i assume being that you will release it in the next month, there has to be some level of information to provide to the board to give us understanding of how this fits in with the larger picture. >> thank you for the question. director risken mentioned was in the draft review of the process. i think we can cull out
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data to send it to you to specifically answer your question. i think what you are getting at, with inclusion of this property, which is assumed in the real estate study what are the additional needs of this. qualify dad that -- qualified data? >> yes. i want the picture of how this fits in but also the new leases we have taken on. that is what the real estate master plan s. it would have been great if this dove tailed together and we could like at the master plan and potentially approve this lease, getting a sense of the universe in terms of facilities. looking at the lease in and of itself, it is hard to support this without getting the larger context. all the additional information is helpful. it would be helpful to get as much as possible. >> let's see what we can do. we will try to get you
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something more concrete without the entire draft document. >> is there someone who can speak to us about real estate in the peninsula as well? i get that san francisco is tight. we, if anything, have reduced industrial real estate market and pdr. it is something i have a lot of concern for. it means a certain type of economy and jobs no longer exist. given the fact we have reducing industrial parcels, especially the site sfmta is looking at, we will have to look in other jurisdictions. that is less of an issue that we are looking at daly city then the question, what else is there. is this the only part, you know, large acre site. are there others we can look to purchase accept -- you know. are there other parcels that might cost us less. >> sure. let me turn this over to our brokerage, who knows very well the daly city market and san francisco market.
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>> hi. i'm james worth of colliers, san francisco. i will bring in randy keller. a couple things that came up in the notes. the building you are looking at leasing closed in july 2011, so it's been vacant over a year. the real estate market is in another planet from where it was in july 2011. that property is probably worth twice what they paid for it in the open marketplace, so that needs to be factored into your evaluations. the other thing supervisor campbell mentioned is you are stuck. you are not. you have a right to sublease. let's say you found something in five years and willing to buy it for a price you were willing to pay. you could sublet. i would bet prologis would be happy by to let you out. it will be worth more. you shouldn't feel you are
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stuck ten years there are sublease possibilitis in a marketplace getting harder and harder. this building is just over the daly city -- over the san francisco daly city line, literally on the line. there is a portion in san francisco. this was for dry foods operators, 250,000 on 12 acres. there is nothing that compares with it on the peninsula or san francisco. we have been -- i have been working sfmta over ten years. steve bell, your real estate contract manager, we looked at stuff in south city, 245 south spruce, which the airport had a long-term lease for the expansion that didn't occur. we had to relocation from the city. dbi beverages, golden brands to some who know, to 175,000 people we couldn't find anything in san francisco that. is one of
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the constrictive things. the accusation by sales force is skewed. everybody looks at that and tries to comp the amount of money per square foot they paid is off the charts. i don't think it is reproducable. in daly city one of the reasons we were able to do this is that the huge development in visitacion valley, which was a redevelopment project, which is now off the table for now, i think one of the reasons we were able to acquire the leasehold there and not have any flak from daly city, planning department and supervisors in daly city is that is a dead piece of land, 20 acres that would take 10, 20 years to develop. fit was in development i think it would